And you were worried about Iran. China's People Liberation Army has come out and openly said that the nuclear option, i.e., selling US Treasuries, is now on the table and should be exercised as "punishment" for U.S.' arms sales to Taiwan. China undoubtedly realizes that this is a prime example of sado-masochism as the resultant plunge in Treasuries that would follow would hurt the US certainly, but also have a "mild to quite mild" impact on China's $700 (and likely much greater) UST holdings. Game theory 101 just got interesting.

Senior Chinese
military officers have proposed that their country boost defense
spending, adjust PLA deployments, and possibly sell some U.S. bonds to
punish Washington for its latest round of arms sales to Taiwan.

The calls for broad retaliation over the
planned U.S. weapons sales to the disputed island came from officers at
China's National Defence University and Academy of Military Sciences, interviewed by Outlook Weekly, a Chinese-language magazine published by
the official Xinhua news agency.

The
interviews with Major Generals Zhu Chenghu and Luo Yuan and Senior
Colonel Ke Chunqiao appeared in the issue published on Monday.

The
People's Liberation Army (PLA) plays no role in setting policy for
China's foreign exchange holdings. Officials in charge of that area
have given no sign of any moves to sell U.S. Treasury bonds over the
weapons sales, a move that could alarm markets and damage the value of
China's own holdings.

While far
from representing fixed government policy, the open demands for
retaliation by the PLA officers underscored the domestic pressures on
Beijing to deliver on its threats to punish the Obama administration
over the arms sales.

"Our
retaliation should not be restricted to merely military matters, and we
should adopt a strategic package of counter-punches covering politics,
military affairs, diplomacy and economics to treat both the symptoms
and root cause of this disease," said Luo Yuan, a researcher at the
Academy of Military Sciences.

Not only that, but China is now openly escalating vis-a-vis Taiwan.

Chinese has blasted the United States over
the planned $6.4 billion arms package for Taiwan unveiled in late
January, saying it will sanction U.S. firms that sell weapons to the
self-ruled island that Beijing considers a breakaway province of China.

China
is likely to unveil its official military budget for 2010 next month,
when the Communist Party-controlled national parliament meets for its
annual session.

"Clearly propose that due to the threat in the Taiwan Sea, we are increasing military spending," said Luo.

Last
year, the government set the official military budget at 480.7 billion
yuan ($70.4 billion), a 14.9 percent rise on the one in 2008,
continuing a nearly unbroken succession of double-digit increases over
more than two decades.

Next question: will China follow through on the increasingly populist sentiment to hurt the U.S. If the U.S. is any indication of the strength of populist anger, now may be a good time to take some "profit", or book the loss as the case may be, in that 30 Year position.